[Updated 3/10/16 2:12 pm. See below.] In the three years since it opened, Seattle business-to-business accelerator 9Mile Labs has tweaked just about every aspect of its model for mentoring, supporting, and funding companies. Co-founder Sanjay Puri and his partners are seeking the right formula amid a boom in the business of gooming startups for fast growth and investment.
Across the country, there are now about 140 accelerators—narrowly defined as competitive three-to-six month, cohort-based education, mentorship, and investment programs for startup companies—up from just two, Y Combinator and Techstars, a decade ago. (There are many more programs better defined as business incubators, angel investment forums, or hybrid approaches.)
“The accelerator business model is new,” said Sanjay Puri, 9Mile Labs co-founder, in an interview before 11 companies in the accelerator’s latest cohort took the stage to pitch their businesses last week.
The latest batch of companies aspire to modernize the paper-heavy process of international shipping (Globatom), meld human and robotic expertise to improve waste sorting (Jodone), and bring cloud-connected sensors to the storm water management industry (StormSensor).
9Mile began in 2013 by replicating the model of other accelerators. But it has since incorporated significant changes to better serve its business-focused startup companies, and reflect the unique circumstances of the Pacific Northwest, Puri said.
“We’ve refined it, we’ve learned a lot, we’ve taken our lumps and had our successes,” Puri said. “But the idea is we continue to refine it.”
This kind of iteration is essential. The accelerator landscape is crowded, creating competition to attract the best startups, mentors, and investors. In the Seattle area alone, there are at least five programs that meet the narrow definition of a startup accelerator. Using a broader definition that includes incubators, PitchBook, a venture capital data provider, counts 22.
Ian Hathaway, a nonresident senior fellow in the Metropolitan Policy Program at the Brookings Institution, recently summarized the handful of academic studies of accelerator outcomes.
“Accelerators can have a positive effect on the performance of the startups they work with, even compared with other key early-stage investors, such as leading angel investment groups,” Hathaway wrote. “However, this finding is not universal. So far, positive effects have been only attributed to leading accelerators. Outside of those, the impact of participation in an accelerator may be ambiguous—or perhaps even negative.”
9Mile Labs has reduced the length of its program from six months to 14 weeks. It has asked its mentors—three of whom are assigned to each company—to sign contracts, and rewarded them with equity in 9Mile’s portfolio. Puri says this isn’t most mentors’ primary motivation, but it encourages them to think of how they can help more companies.
“Because our focus is so much on the Pacific Northwest ecosystem, it reinforces that thinking, which is ‘Hey, if we are going to create success in this ecosystem, let’s share in the fruits of that success,’” Puri said. “That’s been a big one.”
But the biggest change at 9Mile Labs are new investment criteria. Beginning with the 11 companies that comprised the accelerator’s just-completed fifth cohort, startups accepted to the program receive a $35,000 initial funding round in exchange for a stake equal to about 7 percent of the company. (It’s now structured as a convertible note rather than a straight equity investment, in part to address the tax implications of co-founders who join later.)
Subsequent $35,000 tranches—up to a total investment of $105,000—hinge on a startup reaching specific milestones.
The second tranche, $35,000 in exchange for an additional 2 percent of the company, is tied to a startup proving it has found a problem worth solving, and has a solution. “You’ve actually discovered a problem or a pain point, and then you have a prototype or some validation from a set of customers that this works, and your usage and/or adoption of the product is growing,” Puri said. Three or four of the 11 companies in the latest cohort are nearly at this level, he added.
The specific metrics that constitute this “problem-solution fit” are customized for each company. In one example, a startup might need to have five signed letters of intent from potential customers; a defined number of active customers whose usage is growing at least 5 percent each week; an identified addressable market worth at least $1 billion; at least five potential acquirers; a financial model and evidence that it can eventually be profitable; and progress on the nine company-building milestones outlined in the accelerators’ “innovation framework.”
(This framework, which 9Mile shared in a blog post earlier this year, is a distillation of what it has learned over three years, with 48 companies going through the program. “There is a lot of gut-feel, subjectivity in helping companies,” Puri said. “You cannot build companies based on a formula. However, you need to have a checklist. You need to have some methodology, some framework.”)
The third investment tranche, another $35,000 for an incremental 1 percent of the company, comes when a company has shown “solid momentum, exponential customer growth,” Puri said.
Twenty of the 37 companies to go through 9Mile Labs’ first four cohorts have raised additional investment, Puri said. [An earlier version of this paragraph, based on PitchBook data, said only a handful had raised funding beyond the accelerator’s initial investment. Puri said that data was not up to date.]
“We deem customer acquisition, revenue, and growth to be the metrics that matter to measure success of companies,” Puri said. “Funding metrics are but an imperfect proxy to measure success.”
Of the 48 companies in 9Mile’s portfolio, two have been acquired and five have shut down, he added.
The idea behind the new tranched investment model is to closely link 9Mile’s own subsequent investments to those “metrics that matter,” and thereby make the startups more attractive to outside investors.
“Our hope is that the companies don’t need our money, that the ecosystem is actually going to see the promise,” Puri said. “Because what we’re seeing is companies making solid progress, they have everything going for them, but we are a slightly more risk-averse ecosystem. Our angel investors are not as risk-seeking as we would like for them to be.”
9Mile Labs is forging ahead with a new $10 million to $12 million fund, which it is raising now, Puri said. And it’s getting ready to pick its next cohort of companies. Applications for its sixth cohort are due April 18.
